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Incorporation clauses: wider than you think?

A recent case highlights the care needed in drafting clauses in contracts intended to incorporate terms from separate agreements.

Incorporating terms of a separate contracts into an agreement is a common practice in the construction industry, particularly in call-off agreements under framework contracts and when sub-contracts incorporate the terms of a main contract.

In the recent Court of Appeal case of Northrop Grumman Missions Systems Europe Limited (Northrop) v BAE Systems (Al Diriyah C4I) Limited (BAE) the Court considered whether a termination at will clause in a framework agreement could be incorporated into a separate licencing agreement in circumstances where the two agreements were not made between precisely the same parties.

THE FACTS

In December 2010, BAE entered into an agreement with Northrop for the supply of software licences and related training and support. The licencing agreement was brief and contained no express termination clauses. It was however said to be ‘governed by’ terms of a separate framework agreement made between Northrop and BAE’s sister company, BAE Systems Integrated System Technologies Limited (BAESI). The framework agreement contained several clauses relating to termination, including one allowing BAESI to terminate at will.

BAE sought to terminate the licence agreement and relied upon the termination at will clause contained in the framework agreement.

THE DECISION

The Court found that the termination at will clause did apply to the licencing agreement. The fact that the BAE entities were different or indeed that such a finding required some ‘modification’ to the provisions in the framework agreement did not prevent the incorporation of this clause. It was relevant that the termination provision was not inconsistent with any clause contained in the licencing agreement.

The Court was also unimpressed with Northrop’s technical argument that the phrase ‘governed by’ was not the same as incorporation. It considered the phrase was sufficiently clear to convey the parties’ intention.

COMMENT

As is often the case in contract disputes, clarity is key. The easiest way to incorporate terms from one contract to another is to list out the terms which are to be incorporated so as to leave no room for ambiguity. Simply referring to a head contract in general terms may not deliver the intended result. Although in this instance the general incorporation was sufficient, that result still required a trip to the Court of Appeal. On another day with some different or more nuanced drafting, the Court may have taken a different view.

Compare jurisdictions: Arbitration

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